Starting a business is very expensive. A shoestring budget can only take an enthusiastic entrepreneur so far before he or she hits the ceiling. Sheer capital will be needed to ensure that there is stable cash flow and real growth in the business.
Investors are looking for dynamic startups pragmatically feasible to be able to fulfill the yet not met need of a particular market. For that purpose, the founder needs to have an in-depth understanding of the consumer demand of the market.
Venture capital firms are the investment firm that funds and mentor’s startups and other young companies, venture capital firms are basically similar to private equity firms. They invest in promising private companies using the raised capital from limited partners.
Evaluating startup is important because it is necessary to determine their potential to be different, to take and maintain market share, and perform better than or compete effectively with competitor businesses. Startups with strong-lasting competitive advantages are bound to perform well in the long run. The VCs also assess the risks of the startup.
Choosing the appropriate VC for your startup is an important decision. Consider including the stage of your company, the level of funding you require, and the type of relationship you seek with your VC. This is important because to find out that there are less chances of startup to fail as many investors will be wiling to invest will know the future predictions.
THE WAY IN WHICH VENTURE CAPITAL FIRMS EVALUATE STARTUP ARE:
Several key criteria also help VC firms determine the worth of investing in new startups. Similarly, like any other form of investment, VC firms invest after calculated risk.
Team and Founders
Founding Team, the quality of the founding team is the most important criterion as VC firms look for experience and expertise as the funders’ track record, their experience in the industry, and any related technical expertise.
They must have leadership and vision as leader must have the ability to inspire a team and a vision that might describe in vivid terms where the company is headed.
They must know and should have the ability to implement the business plan designed and then adapt with changing conditions, founders who are strongly committed and passionate about the success of the startups.Uniqueness of the business
Among the very first questions that the startup will be asked is about what is new about their offerings, or what special advantages do they offer when compared to competitors and the answers must be accurate and with confident. Companies will likely be saturated with similar products or services. The competition will be strongly aggressive. Equally, a significant number of startups will be on the lookout for venture capitalists’ money. In such a crowd, a good USP will make all the difference for you.
Consumers in every marketplace, irrespective of the industry, get excited about new or innovative ideas. And at this stage, donor retention becomes equally key. The higher the donor retention rate, the more loyal customers it often signifies, which means they could have a unique value proposition that resonates strongly with them. Therefore, if your startup has some unique strategy for retaining donors, then that can offer yet another competitive edge in terms of customer loyalty as well as recurring revenue.
Market Size and Opportunity
Venture capitalists must invest in startups targeting big and growth-enabling markets as there will be more opportunities for scale and returns. For this purpose, they analyze the market size in which amount of total addressable market should be sustainable enough to enable to startup to pursue growth in needed returns. The market should be growing so that startup can capitalize on the growing demand. Market trends are also considered be VC as to see whether the startup has an opportunity to benefit from today and tomorrow’s trends.Product and Technology
A startup product or service is crucial to its success; VCs considers that does the product solve a real problem in new or significantly better ways. Does the product differ from others, and what are the barriers that will prevent others from entering into the market. VC investors favor new businesses with proprietary technology, be it in the form of patents, which gives a positive competitive edge.Financial forecast
An astute investor would like to ensure that his money is invested by a financially prudent entrepreneur. In any case, investments are only aimed at earning a return on investment. If a business owner is not exercising due diligence in managing their financial liabilities, they may also mismanage the investment.
Therefore, venture capitalists will ask you for your financial numbers. You have to prove your stability in terms of finances. Investors would like to see the potential you have achieved with the amount of money you presently have. Having claimed to have a sound financial track record, you are obliged to bring all possible evidence. Be prepared to be asked for questions about your budgeting principles, the expense areas, debt, income ratio, and other such relevant aspects.
If you faced some kind of financial crisis in your business, own up to it. Investors tend to invest in people they like, and besides, you can bet that most likely the investors will find out anyway-sooner or later.Exit strategy
You must establish that the risk of the investment from a venture capitalist’s perspective is being borne from your side. Since the studies argue that about 90% of the startups fail, you have to assure them that you intend to make as little of this risk as possible. An effective draft of an exit strategy should be done to ease the unease with this risk.
Show that you have an exit strategy or other contingency to protect the investor’s interest, you are demonstrating to him that you are cooperative. That’s a good positive for any potential investor.
CONCLUSION: –
Investors want to know that they are making informed decisions when choosing a start-up upon which to invest. If you desire to acquire the capital for taking your business to the next level of growth, you need to be able to present them with proof that yours is the smartest investment.
Venture capitalists will want to know how you plan to use their capital, and how smartly. You’re going to have to prove to them that your business plan is in good order and that you can indeed achieve the key milestones you claim you can.
Finally, capital investment is a game in return on investment, and the metrics by which you are being rated are simply metrics of the probability that your startup will be a success. So, evaluating startups are very important.